HG 
2565 
W3 
MAIN 


$B    TS    M^fl 


1  Reserve  System 
the  Banks 


iiuiN.  r/AvJL  M.  WARBURG 

Member  Federal  Reserve  Board 
Washington,  D.  C. 


STATE 
BANKLRS 


The  Federal  Reserve  System 
and  the  Banks 

HON.  PAUL  M.  WARBURG 

Member  Federal  Reserve  Board 
Washington,  D.  C. 


NEW 
YORK 
STATE 


THIS  ADDRESS  WAS  ORDERED  PRINTED 

AND  DISTRIBUTED  BY  THE 

NEW  YORK  STATE  BANKERS*  ASSOCIATION 

IN  CONVENTION  ASSEMBLED 

JUNE  9th.  1916 


THE  FEDERAL  RESERVE  SYSTEM 
AND  THE  BANKS 


HON.  PAUL  M.  WARBURG 

II 

Member  Federal  Reserve  Bank 
Washington,  D-  C. 


Address  Before 
THE  NEW  YORK  STATE  BANKERS- 
ASSOCIATION  CONVENTION 
ATLANTIC  CITY.  NEW  JERSEY 
JUNE  9th,  1916 


INDEX 


PAGE 

American  Bankers'  Acceptances  4 

Branches  in  Foreign  Countries  5 

Banks  Organized  To  Do  Business  In  Foreign  Countries 6 

Use  of  American  Credit  Facilities  As  Against  Foreign 6 

Recommendations  of  Conference  of  International  High  Commis- 
sion at  Buenos  Aires  7 

Uniform  Mo'iJ^y'-pf  Account.  : .; ^ 

Legislative  Handicap  fn  tne  Past   lo 

AmendmeJits'  t6 'Fed era t  Reseipvc  Act  1 1 

Three  Months'  Bankers'  Drafts 1 1 

Domestic  Acceptances  1 1 

Branches  Within  City  Limits I2 

Branches  Within  County  Limits,  etc 12 

Loans  on  Improved  Real  Estate 12 

Short  Advances  to  Member  Banks   13 

Issue  of  Federal  Reserve  Notes  Against  Gold 13 

Broadening  of  Powers  But  No  Lowering  of  Banking  Standard.  .  .  14 

Pyramiding  of  Reserves   16 

Analysis  of  Present  Reserve  Situation 17 

No  Basis  for  4  Billion  Loan  Expansion   19 

Our  Opportunities  Limited  Bv  Our  Control  of  Gold 20 

Increased  Lending  Power  No  Inflation 22 

Future  Reserve  Requirenients  ^.^^^-^.-r-r^-, ^ .  ,^. 23 

State  Banks  and  Trust  Companies 24 

Objections  and  Answers 25 

Dividends  of  Federal  Reserve  Banks 25 

Right  of  State  Banks  to  Withdraw 26 

No  Examination  by  Comptroller  26 

Amended  Clayton  Act 2^] 

Contribution  By  All  Essential  to  Success 28 

Exchange  Charges  by  Country  Banks 29 

New  Opportunities 29 

Message  to  State  Banks  and  Trust  Companies 30 

Summary  and  Conclusion 32 


U.  C.  BERKELEY  LIBRARIES 


CDbs^3^3^E 


.3665 


^  The  Federal  Reserve  System  and  the  Banks 


A  SUCCESSFUL  solution  of  Federal  Reserve  prob- 
lems is  dependent  equally  upon  a  thorough  under- 
standing of  the  many  features  of  detail  involved  in  the 
technique  of  banking  and  upon  a  strong  grasp  of  the  big 
and  fundamental  objects  for  the  accomplishment  of 
which  the  system  was  created. 

It  is,  therefore,  a  pleasure  to  address  an  audience  that 
is  certain  to  have  a  keen  and  sympathetic  interest  in  both 
of  these  phases  of  the  problem.  I  am  particularly 
anxious,  however,  to  speak  to  you  about  the  broader 
and  more  fundamental  questions  involved,  for  there  is 
an  indefinite  feeling  of  apprehension  in  my  mind  that 
at  this  time  we  may  be  losing  the  big  point  of  view  of 
financial  statesmanship,  and  that  petty  and  technical 
questions  may  be  claiming,  perhaps,  too  much  of  our 
consideration. 

While  in  South  America  I  had  an  opportunity  to  get  a 
bird's-eye  view  of  the  operation  of  the  Federal  Reserve 
System.  With  the  keenest  enjoyment  and  pride  I  saw 
our  system  hitting  its  mark  many  thousands  of  miles 
away,  and  became  deeply  impressed  that  we  are  now 
firmly  establishing  ourselves  as  a  great  financial  power 
in  the  world's  market.  Upon  my  return  I  felt  a  very 
chilling  change  of  atmosphere,  when  1  met  American 
bankers  appearing  to  hold  the  view  that  the  fnture  of 
our  great  monetary  and  banking  system  depends  upon 
the  question  whether  or  not  a  country  bank  might  charge 


340513 


American 

Bankers* 

Aeeeptaneea 


exchange  of  cue- tenth  of  one  per  cent  when  remitting 
for  checks  drawn  on  itself  I 

The  banking  system  of  a  world  power  cannot  possibly 
be  construed  upon  so  small  a  foundation. 

I  still  remember  that,  when  I  had  my  first  training  in 
banking  in  Hamburg,  thirty  years  ago,  my  dear  old 
father's  mind  strongly  rebelled  against  what  he  consid- 
ered then  the  new-fashioned  idea  of  being  required — not 
by  the  government,  indeed,  but  by  the  general  law  of 
competition — to  discontinue  the  practice  of  charging  a 
small  commission  Avhen  remitting  for  checks  or  maturing 
bills  drawn  on  his  banking  firm.  But  he  soon  perceived 
that  the  establishment  of  a  general  transfer  and  clearing 
system,  postal  orders  and  postal  checks,  had  made  for 
new  conditions  and  that  the  development  of  a  discount 
system  based  upon  modern  principles  of  banking,  while 
breaking  doAvn  certain  petty  revenues,  was  bringing 
about  a  tremendous  increase  in  the  volume  of  business. 
As  a  result,  he  soon  waived  his  objections  and  lent  his 
hand  in  turning  his  country  from  provincialism  into  an 
international  banking  power.  That,  as  I  said,  was  thirty 
years  ago. 

I  have  no  doubt  that  this  country  has  decided  that  it 
is  entitled  to  as  modern  a  banking  system  as  the  rest  of 
the  world,  and  that  whatever  old-fashioned  privilege  still 
blocks  the  path  will  have  to  fall  by  the  wayside.  The 
sacrifice  will  have  to  be  borne  for  the  general  good  and 
will  find  its  compensation  in  the  freer  economic  develop- 
ment of  the  country. 

One  of  the  most  tangible  results  of  the  operation  of  the 
Federal  Reserve  System  is  the  establishment  and  growth 
of  the  American  bankers'  acceptance  business.  In  ad- 
dressing a  group  of  bankers  it  is  unnecessary  to  dwell  at 
length  upon  the  fundamental  importance  of  this  develop- 
ment for  the  general  safety  of  our  banking  system.    We 


have  now  a  substantial  market  for  bankers'  acceptances 
to  which  all  member  banks  will  look  for  the  investment 
of  some  of  their  idle  means  and  in  which,  at  any  time, 
they  may  reconvert  these  holdings  into  liquid  funds. 

The  more  important  this  market  grows,  the  stronger 
will  be  the  position  of  the  Federal  Keserve  Banks,  for 
the  greater  or  lesser  volume  of  purchases  of  such  accept- 
ances will  offer  one  of  the  Federal  Keserve  Banks'  most 
effective  means  of  exercising  a  wholesome  influence  upon 
the  fluctuation  of  interest  rates.  As  normal  conditions 
are  re-established  in  the  world,  this  acceptance  market 
will  become  an  important  factor  in  protecting  our  ex- 
change position  with  foreign  countries  and,  incidentally, 
our  gold  holdings.  It  has  taken  some  time  to  develop 
this  market,  but  I  am  confident  that,  from  now  on,  its 
groAvth  will  be  rapid.  One  of  the  obstacles  that  made  the 
start  diificult  was  found  in  the  fact  that  many  accept- 
ances, which  are  made  for  the  purpose  of  financing  im- 
Iportations  and  exportations,  have  to  be  drawn  and  sold 
in  foreign  countries. 
ranches  In  Order  to  make  them  negotiable  in  those  countries  as 

C  untrieJ^  ^  popular  and  current  means  of  exchange,  it  was  first 
necessary  to  find  banks  there  which  would  be  willing  to 
purchase  them  freely  whenever  offered.  It  is  unneces- 
sary to  say  that  European  banks  operating  in  these  for- 
eign fields  were  not  overanxious  to  see  American  bank- 
ers enter  a  business  which  they  themselves  monopolized 
up  to  the  beginning  of  this  war.  It  is  only  since  our  own 
banks  went  out  into  foreign  lands  and  established  their 
own  branches  that  the  necessary  foreign  market  for 
American  acceptances  has  been  developed.  The  establish- 
ment of  foreign  branches  of  American  banks  has  been  a 
most  important  step  in  advance,  and  without  it  our  ac- 
ceptance system  could  not  have  progressed  as  far  as  it 
has   today.     The  advent  of  these  American   branches 


Bank» 
Organized 
to  do 

Business  in 
Foreign 
Countries 


Usm  of 

American 

Credit 

Facilities 

as  Against 

Foreign 


forced  the  other  banks  to  modify  their  resistance  and  to 
compete  for  our  bills  which,  up  to  that  time,  they  hati 
tried  to  disregard.  It  is  to  be  hoped  that  other  American 
banks  will  soon  follow  in  establishing  themselves  in  for- 
eign countries. 

As  you  know,  the  Federal  Reserve  Board  has  recom- 
mended an  amendment  to  the  Act  to  enable  national 
banks,  singly  or  jointly,  to  hold  stock  in  banks  organized 
'^principally  to  do  business  in  foreign  countries."  One 
bill  has  already  passed  the  House,. and  another  has  been 
reported  favorably  by  the  Senate  committee  on  banking 
and  currency.  The  Board  hopes  that  a  satisfactory  bill 
will  be  agreed  upon  by  both  houses  in  the  very  near 
future. 

It  is  a  strange  fact,  however,  that  many  of  our  busi- 
ness men,  who  enjoy  the  reputation  of  being  keen  and 
progressive,  are  actually  wasting  their  funds  by  still 
using  foreign  acceptance  credits  instead  of  American. 
At  Rio  I  found  to  my  surprise  that  the  majority  of 
American  coffee  importers  were  still  using  letters  of 
credit  in  sterling  for  which  they  were  paying  a  discount 
rate  of  about  4%%  as  against  the  American  discount 
rate  of  2%.  Moreover,  in  doing  so,  they  were  often  pay- 
ing two  commissions,  one  to  the  foreign  banker  who 
issues,  and  one  to  the  American  banker  who  opens  the 
credit,  instead  of  paying  a  single  commission  to  the 
American  banker. 

It  is  true  that  the  wool  and  hide  business,  done  by 
New  England  with  the  Argentine,  is  today  financed  by 
dollar  acceptances  drawn  on  Boston  and  New  York,  and 
that  the  oriental  trade  has  begun  to  use  dollar  bills,  but 
it  is  surprising  that  so  large  a  number  of  New  York  im- 
porters ai"e  still  clinging  to  their  old  pound  sterling  ac- 
ceptance arrangements. 

Let  me  venture  to  urge  most  earnestly  that  our  bank- 

6 


\ecomtnenda- 
•oris   of 
junference  of 
iternational 
Hgh   Com' 
\is8ion   at 
uenoa 
irm» 


•TS  canvass  their  lists  of  importing  and  exporting  firms 
and  point  out  to  them  the  folly  of  not  using  American 
banking  facilities.  Since  my  return  1  have  tried  to  see 
personally  some  of  these  large  importing  firms  and  ex- 
plain to  them  the  anomaly  of  their  action.  I  believe, 
however,  that  an  association  like  yours  is  particularly 
well  adapted  for  carrying  on  a  campaign  of  education  of 
this  kind. 

With  our  increasing  financial  strength  and  with  the 
daily  diminution  of  Europe^s  saving  power,  it  stands  to 
reason  that,  for  a  long  time  to  come,  our  discount  rates 
will  compare  favorably  with  those  of  Europe.  We  may 
expect,  therefore,  that  this  acceptance  business  will  not 
only  hold  its  own,  but  will  grow  and  may  be  used  to  a 
substantial  extent  even  by  European  importers  and  ex- 
porters, and  thus  relieve  Europe  of  some  of  her  financial 
burdens. 

While  our  foreign  competitors,  with  few  noteworthy 
exceptions,  are  still  trying  to  keep  our  dollar  acceptances 
in  obscurity,  our  machinery  is  now  firmly  organized. 
There  are  now  local  banks  almost  everywhere  abroad 
willing  to  buy  American  drafts  going  forward  for  accept- 
ance and  to  deal  in  dollar  exchange  on  practically  the 
same  narrow  margin  which  prevails  in  dealings  in 
sterling,  marks,  or  francs,  and  the  Federal  Reserve  Banks 
are  willing,  whenever  desired,  to  do  their  share  by  quot- 
ing favorable  "forward  discount  rates"  to  assure  the 
rate  of  discount  pending  the  time  of  transit.  This  new 
feature  of  American  banking,  which  is  to  be  one  of  the 
roots  of  our  strength  and,  at  the  same  time,  a  new  source 
of  profitable  and  sound  banking,  ought  to  be  developed 
energetically  by  both  our  bankers  and  our  business  men. 

In  this  connection,  it  may  not  be  amiss  to  give  you  a 
short  account  of  the  conference  of  the  International  High 
Commission  at  Buenos  Aires. 


Ill  out-  deliberations,  tiie  question  of  banking  was 
•given  particular  attention,  ami  1  am  happy  to  report 
that  tlie  general  tendency  at  the  conference  was  to  do 
everything  possible  to  foster  trade  relations  between  the 
United  States  and  her  neighbors  to  the  South,  and  mu- 
tually to  open  the  doors  wide  to  one  another's  banks. 
Kesolutions  were  passed  making  for  the  adoption  by 
Central  and  South  America  of  uniform  laws  concerning 
bills  of  exchange,  bills  of  lading,  warehouse  receipts,  and 
similar  matters.  A  further  recommendation  was  adopted 
by  the  conference  urging  the  respective  governments  to 
enact  legislation  giving  the  widest  possible  protection  to 
the  sellers  of  goods. 

You  are  all  familiar  with  the  agreements  for  the  arbi- 
tration of  business  disputes  made  between  the  United 
States  Chamber  of  Commerce  and  the  Chamber  of  Com- 
merce of  Buenos  Aires.  We  may  expect  that  other  coun- 
tries will  follow  in  the  very  near  future,  and  the  crea- 
tion of  these  agreements  will  be  an  important  factor  in 
obviating  the  annoyance  and  delay  of  protracted  litiga- 
tion in  foreign  countries  and  in  providing  for  both  sides 
a  safe  and  satisfactory  basis  for  commerce  and  trade. 

Uniform  I*  would  lead  too  far  to  enumerate  all  the  topics  dis- 

Money  of      cusscd  by  the  conference.     I  should  not  omit,  however, 

Account  .  . 

to  mention  that  a  resolution  was  passed  recommending 
that  all  the  republics  of  North,  Central  and  South  Amer- 
ica adopt  a  uniform  standard  of  money  of  account  on 
the  basis  of  a  gold  coin  9/10  fine  and  weighing  0.33437 
gramme.  This  unit,  which  might  be  called  the  Pan- 
American  franc,  though  nearly  the  value  of  the  Euro- 
pean franc,  is  not  its  exact  equal,  but  is  precisely  one- 
fifth  of  the  United  States  gold  dollar.  Delegates  to  the 
conference  had  suggested  making  the  gold  dollar  of  the 
United  States  the  unit  for  all  American  countries,  but 
against  this  it  was  pointed  out  that  the  dollar  would  be 

8 


I 


too  large  a  denomination  for  many  of  the  Southern  re- 
publics, Avhere  small  coins  circulate  and  where,  it  was 
feared,  the  larger  unit  of  money  of  account  would  bring 
about  an  increased  cost  of  living.    Moreover,  the  United 
States  gold  dollar  could  not  be  divided  into  subsidiary 
coins  small  enough  to  comply  with  the  known  demands 
of  many  of  these  countries.    It  was  thought,  therefore, 
that  a  unit  of  the  approximate  size  of  the  franc  would 
be  better  adapted  to  the  needs  of  these  countries,  but, 
by  adopting  as  the  standard  unit  the  exact  one-fifth  of 
the  United  States  dollar,  the  foundation  will  have  been 
laid  for  a  Pan-American  union  of  coins  which,  sooner  or 
later,  may  become  of  great  importance.     If  this  plan 
should  be  carried  into  actual  effect,  the  Pan-American 
20  franc  piece  could  ultimately  circulate  with  us  as  a 
|4  gold  piece  and  our  |5  gold  piece  could  circulate  as  a 
25  franc  piece  in  South  or  Central  American  countries. 
A  unity  of  standards  of  this  kind  will,  of  course,  have 
great  advantages  in  facilitating  trade  between  nations. 
Amongst  republics  having  actually  introduced  a  gold  cur- 
rency on  this  basis  it  might  ultimately  lead  to  an  under- 
standing for  the  establishment  of  international  gold  trust 
or  clearing  funds,  having  for  their  object  the  elimination 
of  the  costs  and  risks  caused  by  our  present  wasteful 
method  of  shipping  and  remelting  gold  coins.     A  plan 
on  these  broad  lines,  submitted  by  the  American  dele- 
gates, was  recommended  by  the  conference  for  closer 
study  to  all  governments  concerned. 

The  immediate  practical  importance  of  this  step  may 
not  be  great.  As  indicative  of  the  trend  of  future  rela- 
tions between  North  and  South  American  republics,  how- 
ever, it  cannot  be  overestimated.  It  shows,  as  one  of  the 
effects  of  the  war  and  of  our  financial  emancipation,  that 
the  North  and  South  have  recogniziHl  their  common  eco- 
nomic and  political  interests;  that  they  have  begun  to 
consider  this  large  hemisphere  as  one  economic  unit,  and 


that  they  are  now  looking  to  each  other  for  mutual  help 
and  co-operation  in  the  future  development  of  their  re- 
spective problems.  A  Pan-American  monetary  union, 
therefore,  now  appears  a  more  natural  basis  for  the 
future  monetary  systems  of  American  republics  than  a 
Latin  union  based  upon  an  agreement  with  France,  Italy, 
Switzerland  and  Belgium. 

•  Our  friends  in  South  America  consider  the  creation 
of  our  Federal  Reserve  System  as  one  of  our  greatest 
achievements,  and  their  willingness  to  rely  upon  our 
ability  to  provide — to  a  certain  extent  at  least — such 
financial  aid  as  Europe  gave  them  in  the  past  is  predi- 
cated upon  the  confidence  that  our  new  system  inspires. 
Some  of  these  republics  are  carefully  studying  this  sys- 
tem with  a  view  to  establishing,  at  the  proper  time,  a 
similar  banking  machinery.  In  view  of  the  fact  that 
several  of  these  countries  are  federations  like  the  United 
States  and  cover  tremendous  areas  of  territory,  it  is  evi- 
dent that  certain  features  of  our  system  would  be  par- 
ticularly well  adapted  to  their  needs. 

While  observing  financial  and  commercial  conditions 
fiandica^^  iu  thcse  couutrlcs,  it  was  deeply  impressed  upon  my  mind 
in  the  Past  how  much  the  United  States,  by  legislative  action,  had 
in  the  past  handicapped  the  development  of  our  business 
in  foreign  lands.  It  would  lead  too  far  to  mention  to 
what  extent  our  own  legislation  in  the  past  has  driven 
our  merchant  marine  from  the  ocean  and  how  far  it  has 
handicapped  our  industries  by  not  permitting  reasonable 
trade  combinations  enabling  us  to  compete  in  foreign 
markets.  But  it  is  well  within  the  bounds  of  this  ad- 
dress to  mention  that  the  British,  French  and  German 
banks  for  generations  have  been  entirely  free  to  go  into 
foreign  countries  to  open  branches  or  acquire  foreign 
banks  and  to  do  everything  and  anything  to  further  their 
banking  and  trade.     On  the  other  hand,  our  national 

10 


AmendmentM 
to   Federal 
Reserve  Act 


Three 
months 
bankers* 
drafts 


[ 


Domestic 
Acceptances 


banks,  until  the  passage  of  the  Federal  Reserve  Act,  were 
forbidden  by  law  to  enter  these  fields  or  to  accept  drafts 
for  importations  or  exportations  or  to  exercise  many 
other  functions  necessary  to  develop  foreign  banking  and 
foreign  commerce.  It  is  a  relief  to  feel  that  at  last  the 
time  has  come  when  a  clear  recognition  of  our  country's 
banking  needs  is  asserting  itself  and  when  most  of  these 
old  shackles  have  been  removed.  Whatever  obstacle  re- 
mains we  may  confidently  hope  to  see  gradually  elimi- 
nated. 

Some  amendments  along  these  lines  are  at  present  un- 
der consideration  by  Congress,  and  have  already  been 
favorably  reported. 

The  Board  has  recommended  that  Congress  permit 
member  banks  to  give  their  acceptances  not  only  for  the 
financing  of  transactions  involving  importations  and  ex- 
portations, but  also,  to  a  limited  degree  and  under  the 
supervision  of  the  Federal  Reserve  Board,  for  bankers' 
clean  three  months'  drafts,  such  as  are  required  in  for- 
eign countries  for  remittances  abroad.  As  most  of  you 
know,  in  South  America,  such  remittances  to  foreign 
lands  are  generally  not  made  by  checks,  but  by  three 
months'  drafts,  and  it  is  necessary  that  national  banks 
be  permitted  to  accept  for  this  kind  of  foreign  exchange 
transactions,  if  the  dollar  bill  is  to  be  used  as  freely  in 
foreign  lands  as  is  the  sterling,  the  franc,  and  the  mark 
exchange. 

Turning  to  amendments  touching  domestic  operations, 
we  have  recommended  that  national  banks  be  permitted 
to  accept  drafts  or  bills  growing  out  of  transactions  in- 
volving the  domestic  shipment  of  goods — provided  ship- 
ping documents  are  attached  at  the  time  of  acceptance — 
and  drafts  and  bills  which  are  secured  by  warehouse  or 
similar  receipts  covering  readily  marketable  staples,  or 
by  the  pledge  of  goods  actualy  sold.    We  feel  confident 


II 


tliat,  by  enlarging  tlie  powers  of  national  banks  to  ac- 
cept in  this  manner,  we  sliall  open  for  our  inemlxir  banks 
a  new  and  profitable  field  of  operation,  and  incidentally 
the  free  development  of  this  kind  of  bankers'  domestic 
acceptances  will  be  an  important  factor  in  equalizing  in- 
terest rates  in  the  various  parts  of  the  country  and  will 
be  of  great  benefit  in  this  respect  alike  to  producer  ami 
consumer. 


Branches 
within  city 
limitm 


Branches 
within 
county  lim- 
its, etc. 


We  have  also  proposed  an  amendment  authorizing  any 
national  bank,  located  in  a  city  of  more  than  100,000  in- 
habitants and  possessing  a  capital  and  surplus  of  |1,000,- 
000  or  more,  to  establish  branches  within  the  corporate 
limits  of  its  city,  and  authorizing  any  national  bank  lo- 
cated in  any  other  place,  with  the  approval  of  the  Fed- 
eral Keserve  Board,  to  establish  branches  within  the 
limits  of  its  county  or  within  a  radius  of  25  miles  of  its 
banking  house,  irrespective  of  county  lines.  In  recom- 
mending the  county  line  for  branches,  the  Board  was 
moved  by  the  thought  that  it  might  be  found  convenient 
for  several  small  banks  doing  business  in  the  same  county 
to  combine  into  one  larger  bank,  thereby  reducing  the 
overhead  charges  and  making  the  ileposits  of  one  part 
of  the  county  available  for  the  demands  in  another.  It 
is  the  hope  of  the  Board  that  in  some  districts,  through 
such  co-operation,  it  will  be  possible  to  reduce  the  ex- 
orbitant interest  rates  which,  in  some  instances,  have 
been  charged  by  small  country  banks.  The  Senate  com- 
mittee has  stipulated  that,  for  the  beginning  at  least,  the 
number  of  branches  of  a  national  bank  shall  be  restricted 
to  ten. 


Loans  on 
improved 
real  estate 


We  have  further  recommended  to  Congress  that  any 
national  bank,  not  situated  in  a  central  reserve  city,  be 
permitted,  within  the  same  limits  now  existing  for  loans 
on  farm  lands,  to  make  advances  maturing  in  not  over 
one  year  on  improved  real  estate  located  anywhere  with- 


12 


Short  ad- 
vances to 
member 
banks 


Issue  of 

Federal 

Reserve 

Notes 

against 

gold 


in  a  raflins  of  one  hundred  miles  of  its  place  of  business. 
While  the  Board  does  not  favor  the  idea  of  having  na 
tional  banks  make  heavy  investments  in  mortgages,  it 
was  felt  that  they  should  not  be  precluded  from  taking, 
within  certain  reasonable  limits,  first  mortgages  as  col- 
lateral security  for  their  loans. 

These  are  the  additional  powers  that  we  have  recom- 
mended to  be  given  to  national  banks.  As  to  the  Federal 
Reserve  Banks,  we  have  suggested  that  Congress  permit 
them  to  make  advances  to  their  member  banks  on  the 
latter's  own  notes  secured  by  eligible  paper,  such  loans 
to  be  for  periods  not  exceeding  fifteen  days.  This  has 
been  done  with  a  view  to  enabling  Federal  Reserve  Banks 
to  accommodate  members  who,  in  the  check  clearing  or 
otherwise,  might  be  short  in  their  balances  and  wish  to 
have  short  advances  at  moderate  rates.  We  believe  that 
this  power,  if  granted  to  Federal  Reserve  Banks,  will 
greatly  increase  their  ability  to  take  care,  in  a  simple 
and  effective  manner,  of  the  requirements  of  their  mem- 
bers, and  particularly  of  country  banks. 

We  have  further  recommended  that  Congress  permit 
Federal  Reserve  Banks  to  issue  Federal  Reserve  notes, 
not  only  against  commercial  paper,  but  also  against 
the  deposit  of  gold.  This  amendment,  if  granted,  would 
greatly  strengthen  the  lending  power  and  the  note  issu- 
ing power  of  Federal  Reserve  Banks.  It  is  the  same 
method  that  has  been  followed  in  Europe  by  the 
Banque  de  France,  the  Reichsbank,  the  Bank  of  the 
Netherlands,  the  Bank  of  Italy  and  many  other  govern- 
ment banks.  These  institutions  are  enabled,  through 
their  note  issue,  to  assemble  a  large  part  of  the  gold  of 
the  country  in  a  central  reservoir.  With  us,  up  to  the 
present  time,  this  nccumulntion  of  gold  has  taken  place 
to  only  a  moderate  extent  and  has  not  benefited  the  Fed- 
eral Reserve  Banks  to  the  fullest  possible  degree.    If  the 


13 


amendment  were  to  be  passed,  the  gold,  instead  of  being 
segregated  with  the  Federal  Reserve  Agent,  would  re- 
main an  asset  of  the  Federal  Reserve  Bank,  and,  on  the 
other  hand,  the  notes  issued  against  it,  instead  of  being, 
as  at  present,  technically  redeemed,  would  remain  the 
liability  of  the  Federal  Reserve  Bank. 

In  case  the  amendment  should  pass,  it  is  hoped  that 
the  Federal  Reserve  Banks  may  count  upon  the  co-opera- 
tion of  their  members  in  order  to  facilitate  this  substitu- 
tion of  Federal  Reserve  notes  for  gold  certificates  at 
present  carried  in  the  pockets  of  the  people  in  the  old- 
fashioned  and  uneconomic  manner.  As  in  modern  Euro- 
pean countries,  the  gold  should  accumulate  in  the  Fed- 
eral Reserve  Banks  and  the  people  should  use  instead 
the  Federal  Reserve  notes.  The  amendment  would  be  an 
important  step  in  the  ultimate  simplification  and  con- 
solidation of  our  circulation. 

These  are  the  principal  amendments  recommended  by 
the  Board  at  this  time.  You  will  notice,  gentlemen,  that 
they  move  in  two  directions.  The  one  is  an  increase  of 
the  Reserve  Bank's  general  strength  and  lending  power 
and  an  enlargement  of  their  scope  of  usefulness  in  deal- 
ing with  their  members ;  the  other  is  the  removal  of  lim- 
itations heretofore  placed  upon  the  operations  of  national 
banks. 

Broadening  T^c  Board  fccls  keenly  that,  as  a  matter  of  equity, 
but'no ^lower-  uatioual  banks  should  be  placed  on  a  parity  with  State 
ing  of  hank-    j^^uks  and  trust  companies,  wherever  this  can  be  done 

ing   standard  *        t        %  •  • 

consistently  with  safety  and  conservative  banking  prin- 
ciples. But  I  wish  to  make  it  clear  that  the  Board  has 
recommended,  and  will  recommend,  only  such  measures 
as  will  eliminate  old-fashioned  or  unwise  restrictions 
such  as  should  be  removed  under  any  circumstances,  ir- 
respective of  whether  or  not  the  State  banks  exercise 
greater  or  lesser  powers.    The  Board  would  never  recom- 


mend  granting  national  banks  any  powers  or  privileges 
which  are  contrary  to  good  banking  principles.  It  is  to 
the  interest  of  both  State  institutions  and  national  banks 
that  banking  standards  should  be  raised  wherever  prac- 
ticable and  not  that  they  should  be  lowered.  Between 
the  national  and  State  banking  systems  there  must  not 
be  any  competition  to  secure  more  members  by  a  lower- 
ing of  banking  standards.  The  whole  country  would 
suffer  if  this  took  place.  It  would  be  the  height  of  folly 
if  States  were  to  lower  their  requirements  for  no  other 
reason  than  to  underbid  the  requirements  of  national 
banks.  To  a  certain  degree  this  has  been  done — where 
State  governments  lowered  the  reserve  requirements  for 
their  banking  institutions  because  the  Federal  Reserve 
Act  lowered  the  reserve  requirements  for  national  banks. 
The  lowering  of  the  reserve  requirements  for  national 
banks  was  predicated,  however,  upon  their  joining  the 
Federal  Reserve  System,  subscribing  to  the  stock,  and 
putting  some  part  of  their  reserves  into  the  joint  insur- 
ance fund,  and  being  bound  ultimately  to  abandon  the 
method  of  pyramiding  reserves  and  to  keep  them  instead 
either  entirely  in  metallic  form  or  with  the  Federal  Re- 
serve Banks.  The  reserves  of  State  institutions,  on  the 
other  hand,  were  lowered  without  their  being  required  to 
join  the  system,  make  any  such  contribution,  or  discon- 
tinue pyramiding  reserves.  Moreover,  lower  reserve  re- 
quirements are  justified  for  member  banks  because  they 
may  have  direct  recourse  to  the  rediscount  facilities  of 
the  reserve  system,  but  non-member  banks  have  no  such 
direct  access. 

I  wish  I  could  adequately  impress  upon  the  minds  of 
all  our  bankers  that  there  is  no  such  thing  as  doing  any- 
thing for  the  Federal  Reserve  System.  Whatever  the 
member  banks  do,  and  whatever  the  State  banks  do,  they 
do  for  themselves  and  for  the  country.  The  Federal  Re- 
serve System,  as  such,  is  not  a  self-seeking  and  profit- 

15 


making  organization.  It  belongs  to  the  entire  country. 
It  is  there  for  the  benefit  of  everybody;  for  the  greater 
security  of  the  banks,  and,  througl\  the  banks,  for  the 
security  of  the  people.  If  you  strengthen  the  Federal 
Reserve  System,  you  strengthen  yourselves.  If  you  raise 
the  standard  of  banking,  it  is  for  your  own  benefit — not 
for  the  benefit  of  the  Federal  Eeserve  Banks,  or  least  of 
all,  for  that  of  the  Federal  Reserve  Board. 

These  things  appear  trite,  but  still  I  cannot  help  ex- 
pressing them  because  it  is  so  absolutely  essential  that 
the  thought  be  overcome  that  there  can  be  such  a  thing 
as  a  conflict  of  interests  between  the  Federal  Reserve 
System  and  the  banks.  The  Federal  Reserve  System  and 
all  it  means  is  felt  as  an  opposing  factor  where  it  comes 
into  conflict  with  bad  banking  practices.  It  is  true  that 
the  law  has  for  one  of  its  objects  the  removal  of  certain 
habits  which  have  crept  into  the  old  banking  system, 
but  it  is  equally  true  that,  by  removing  them,  financial 
catastrophes  such  as  used  to  befall  our  country  with  un- 
canny regularity,  are  to  be  avoided  in  the  future. 

Pyramiding        Let  US  Consider,  as  the  strongest  case  in  point,  the 
^ervea  pyramiding  of  reserves.     I  wish  it  had  been  possible  to 

stamp  out  this  evil  within  a  short  time  after  the  open- 
ing of  the  Federal  Reserve  System.  As  it  is,  many  of  the 
smaller  banks  are  still  in  the  condition  of  a  patient  who 
knows  that  he  must  undergo  an  operation  in  order  to  be 
fully  cured,  but  whose  mind  every  now  and  then  rebels  at 
the  thought,  and  who  continually  relapses  into  arguing 
with  himself  that,  after  all,  he  might  possibly  prefer  to 
continue  to  live  with  his  disease  and  take  his  chances  of 
the  certain  recurrence  of  acute  convulsions  and  intense 
suffering  rather  than  to  have  the  operation  performed. 
The  country,  however,  has  decided  that  the  operation  is 
necessary  for  our  future  safety  and  growth,  and  the  vast 
majority  of  our  bankers  are  in  full  accord  that  it  is  the 

i6 


'Analysis  of 
present  re- 
serve sit- 
uation 


wisest  thing  to  do.  The  pyramiding  of  reserves  will  thus 
end  on  November  16,  191T.  But,  afc  1  said,  I  wish  the 
operation  had  already  been  performed. 

At  present  our  national  banks  apparently  have  excess 
reserves  approaching  one  billion  dollars.  Of  these,  a 
substantial  proportion  represents  items  in  transit  be- 
tween the  depositing  and  the  depository  banks;  the  bal- 
ance, excepting  about  $100,000,000  excess  cash  in  vault 
held  by  all  national  banks  outside  of  New  York,  is  kept 
entirely  in  central  reserve  cities,  the  bulk  being  in  the 
City  of  New  York.  There  it  is  on  deposit — drawing  in- 
terest at  the  rate  of  2% — and  loaned  out  on  stock  ex- 
change and  other  collateral,  or  invested  in  commercial 
paper,  except  as  to  the  required  reserve  of  189^o  and  the 
small  total  excess  reserve  of  about  lifty  million  dollars. 
This  is  a  reduction  of  excess  cash  reserves  in  New  York 
of  over  1100,000,000  since  January  22d. 

If  Farmer  Jones  deposits  |1,000  in  a  bank  of  Elk 
River,  Minnesota,  and  this  bank  should  in  turn  deposit 
this  amount  in  a  bank  at  Minneapolis  and  the  Minneapo- 
lis bank  in  turn  deposit  it  in  New  York  at  2%  interest, 
and  New  York  invest  this  money  in  a  piece  of  commer- 
cial paper  at  3%  interest,  it  is  a  most  extraordinary  and 
unique  method  to  permit  Elk  River  and  Minneapolis  to 
count  these  deposits  as  reserves,  while  if  the  bank  of  Elk 
River  had  itself  bought  the  piece  of  paper  it  would  have 
carried  it  as  a  loan  and  all  the  rest  of  the  structure  of 
reserve  bank  deposits  and  reserves  would  have  been 
wiped  out. 

In  other  words,  in  the  final  analysis,  if  we  consider 
the  system  as  a  unit,  there  is  not  an  excess  reserve  of  one 
billion,  but  only  about  $150,000,000  in  cash ;  the  balance 
is  invested  today  in  the  "float,"  representing  uncollected 
items  in  transit,  commercial  paper,  stock  exchange  loans 
and  securities.    If  we  study  the  changes  in  the  condition 


17 


of  the  New  York  Clearing  House  national  banks  which 
have  occurred  between  October  31,  1914,  and  May  1, 
1916,  we  find  the  following  increases  estimated  at: 

(In  millions  of  dollars) 


Oct.  81, 1914. 

May  11, 1916. 

Increase. 

Collateral  loans  

547 
106 

406 

954 

280 

667 

407 

In   istments  in  secu"ities    .... 
Unsecured     loans,     which     in- 
cludes commercial  paper.... 

174 
26i 

Total  

1,200 

2,100 

842 

During    that    period    deposits 
increased   from    

900 

In  addition,  collateral  loans  and  holdings  of  securities 
of  New  York  non-member  trust  companies  increased  by 
about  half  a  billion  since  the  end  of  1914. 

These  are  phenomenal  increases  and  we  might  well  ask 
ourselves  whether  or  not  we  may  take  it  as  a  certainty 
that  so  extraordinary  a  growth  will  prove  to  have  come 
to  stay  or  whether  a  return  of  more  nearly  normal  con- 
ditions will  not  bring  about  a  contraction.  We  should 
well  consider  this  question,  because  an  increase  of  90% 
in  securities  and  collateral  loans — that  is,  an  increase  of 
over  11,000,000,000  in  New  York  City  Clearing  House 
institutions — might  well  suggest  a  policy  of  liquidation 
rather  than  one  of  further  expansion.  Our  national 
bank  cash  reserves  in  central  reserve  cities  (including 
balances  with  Federal  Reserves  Banks,  figured  at  100%) 
were  as  of  March  7,  22.88% ;  in  reserves  cities,  11.53%, 
and  in  country  banks,  9.80%.*  Notwithstanding  that 
the  aggregate  cash  held  by  all  national  banks  increased 


♦If  we  figured  these  balances  at  70%,  being  the  present  cash  reserve  con- 
dition, and  the  actual  metallic  reserve,  and  added  to  cash  In  vault  the  metallic 
cover  maintained  against  reserve  agents  balances,  the  present  cash  cover  would 
■how  as  follows:  Central  reserve,  20.51%  :  reserve  cities,  13.66%.  and  country 
banks.  11.8S%. 


i8 


•  1 


from  May,  1915,  to  March,  1916,  by  over  |100,000,000, 
ill  central  reserve  cities  we  are  today  materially  below 
llie  old  cash  reserve  requireaieuts,  and  if  a  situation 
like  the  present  had  existed  during  any  ante-Federal  Ke- 
serve  System  period,  we  should  have  considered  it  a  cause 
for  alarm.  Thanks  to  the  creation  of  our  new  banking- 
system,  we  are  now  dealing  with  completely  changed 
conditions,  and  the  spectre  of  the  end  of  the  lending 
power  of  the  banks  would  not  mean  a  panic  as  in  the 
past  because  of  the  reserve  lending  power  of  the  Federal 
Keserve  Banks  and  the  confidence  created  by  their  exist- 
ence. But,  gentlemen,  that  must  not  lead  us  into  the 
No  basis  illusion  that  this  billion  of  so-called  excess  reserves  may 
loan  expan-  he  Considered  as  a  basis  for  a  loan  expansion  of  four 
sion  billion  dollars  or  more,  as  appears  to  be  the  general  be- 

lief. Theoretically  there  is  the  foundation  for  so  large 
an  expansion  as  long  as  we  adhere  to  the  old  custom  of 
counting  bank  balances  with  reserve  agents  and  uncol- 
lected items  in  transit  as  reserve,  yet,  in  the  last  analysis, 
it  is  the  metallic  cover — not  the  redeposited  and  actually 
invested  reserves — which  must  be  considered  in  dealing 
with  this  question  of  expansion  of  loans.  The  excess  of 
our  nietaUic  reserve,  plus  the  free  gold  of  the  Federal 
Reserve  banks,  constitute  the  ba^is  of  the  reserve  lending 
power  of  our  country. 

We  are  at  present  in  a  condition  of  extraordinary 

strength.    We  have  bought  back  our  own  securities  and 

4  made  foreign  loans  to  an  aggregate  amount  far  in  ex- 

1  cess  of  $2,000,000,000.     Our  financial  position  for  the 

future  has  thus  been  greatly  fortified.    But  the  process 

r  of  absorption  of  our  securities  returning  from  abroad 

^  i'hould  be  conducted  on  su^h  ba^sis  and  scope  as  to  turn 

the  individual  depositor  into  an  investor,  so  as  to  free 

our  gold  reserves,  rather  than  increase  our  Iooms  on  an 

enlarged  floating  supply  of  securities. 

19 


Our  oppor-  We  must  not  forget  for  a  moment  that  not  even  the 
limited  by  ^^^^  experienced  can  foretell  what  demands  may  be 
our  control   made  upon  us  in  the  future.    At  the  end  of  the  war  our 

of  gold. 

opportunities  will  be  gigantic,  but  ultimately  they  will 
be  limited  by  the  extent  to  which  we  are  able  to  control 
our  gold.  There  cannot  be  any  doubt  that  the  demand 
for  gold  at  that  time  will  be  very  keen  and  determined. 
Wise  statesmanship,  to  my  mind,  therefore,  would  indi- 
cate that  everything  should  be  done  by  the  Federal  Ke- 
serve  System  and  by  all  the  banks  that  are  interested  in 
our  strength  to  watch  carefully  furtJier  expansion  at  this 
time  and  to  accumulate  the  floating  gold  supply  in  the 
hands  of  the  Federal  Keserve  Banks  so  as  to  enable  them, 
when  the  time  comes,  if  necessary,  to  spare  large  amounts 
without  thereby  crippling  their  lending  power.  We  are 
in  a  period  of  widespread  prosperity  at  this  time  and  it 
must  be  our  serious  concern  not  to  w  eaken  its  solid  foun- 
dation. The  ease  of  this  summer  might  well  be  used  to 
strengthen  and  prepare  ourselves  for  the  large  problems 
that  may  be  in  store  for  us. 

it  is  impossible  to  try  to  prognosticate  with  any  de- 
gree of  certainty  what  will  be  the  trend  of  interest  rates 
at  the  end  of  the  war,  but  assuming  that  interest  rates 
for  invesments  in  Europe  will  be  high,  and  that  the  de- 
mand for  gold  on  the  part  of  Europe  will  be  keen,  we 
would  have  to  expect  as  a  consequence  that  eventually 
our  rates  will  have  to  move  up  so  as  to  approach  theirs 
more  closely,  and  before  we  reach  that  point  probably  a 
substantial  amount  of  our  gold  will  have  to  leave  the 
country  and  return  to  foreign  lands.  To  preserve  the 
advantage  of  our  strength  and  to  maintain  our  money 
rates  on  an  independent  basis  of  c>ur  own — in  spite  of 
the  close  inter-relation  that  must  exist  between  us  and 
Europe — will  be  one  of  our  interesting  but  difficult  tasks. 

The  establishment  of  the  Federal  Reserve  System  has 

20 


been  a  step  of  inestimable  value  in  the  direction  of  effi- 
cient control  of  our  country's  gold  holdings ;  and,  if  we 
do  not  disregard  all  rules  of  business  conservatism  and 
prudence,  it  will  prove  an  efficient  means  of  protection 
in  case  of  emergencies. 

If  we  want  more  than  a  strong  instrument  of  defense 
and  protection,  if  we  desire — as  we  are  entitled  to — that 
the  Federal  Reserve  System  be  the  foundation  of  a  bank- 
ing structure  contributing  its  full  share  in  rebuilding 
the  world  and  at  the  same  time  assisting  our  own  country 
to  meet  all  the  new  demands,  whether  domestic  or  for- 
eign, that  the  future  may  make  upon  it,  then  we  must 
do  all  we  can  to  preserve  its  strength  and  to  broaden  its 
foundation  by  further  perfecting  methods  of  systemati- 
cally accumulating  and  economically  using  our  vast 
treasure  of  gold.  Too  large  a  proportion  of  this  gold 
still  remains  wastefully  scattered  and  decentralized. 

The  gold  stock  of  this  country  is  estimated  at  $2,320,- 
000,000.  Of  this  amount  only  |3eS5,000,000  is  held  in 
the  vaults  of  the  Federal  Reserve  Banks  and  about  f  180,- 
000,000  is  in  the  hands  of  the  Federal  Reserve  Agents'. 
The  national  banks  and  State  institutions  hold  about 
1800,000,000.  and  there  is  estimated  to  be  in  actual  cir- 
culation about  $870,000,000.  If  we  deduct  from  the 
$335,000,000  held  by  all  Federal  Reserve  Banks  a  mini- 
mum reserve  of  only  40%,  that  would  leave  as  their  free 
gold  about  $200,000,000.  This  is  an  invaluable  item  of 
strength  as  a  basis  for  a  note  isue  of  $500,000,000  in  case 
additional  currency  should  be  demanded  by  our  people; 
and  the  Board,  by  permitting  a  reduction  of  the  40% 
gold  reserve,  could,  in  case  of  emergency,  sanction  the 
issue  of  even  larger  amounts.  When,  however,  it  comes 
to  exportations  of  gold,  you  can  readily  see  that  the 
$180,000,000  now  accumulated  with  the  Federal  Reserve 
Agents  would  serve  as  a  very  welcome  additional  pro- 

91 


Increased 
lending 
power  no 
inflation 


lection.  For  we  have  learned,  gentlemen,  that  this  is  a 
period  of  economic  history,  where  balances  between  na- 
tions are  not  dealt  with  in  millions,  but  in  hundreds  of 
millions. 

Think  of  the  strength  that  our  system  might  possess 
if  we  carried  into  effect  the  policies  pursued  by  the 
Banque  de  France,  the  Reichsbank  or  other  powerful 
central  banks,  and  if,  for  a  substantial  part  of  the  |870,- 
000,000  of  actual  gold  circulation,  there  were  substituted 
our  Federal  Reserve  notes,  and  if  national  and  State 
banks  kept  in  their  vaults  only  what  they  needed  for  till 
money  and  deposited  with  the  Federal  Reserve  Banks  the 
rest  of  their  idle  gold. 

We  talk  of  preparedness  as  the  need  of  the  hour.  If 
we  contemplate  what  European  nations  have  done,  be- 
fore and  during  the  war,  to  strengthen  their  grip  on  their 
gold,  and  compare  it  with  our  own  efforts,  we  find  that 
our  financial  preparedness  is  just  in  its  first  stages.  The 
amendment  recommended  by  the  Board  should  prove  an 
important  step  in  advance  in  this  direction. 

In  view  of  the  statement  made  by  some  of  our  critics 
that  this  substitution  of  Federal  Reserve  notes  for  gold 
certificates  means  infiation,  it  might  be  timely  to  point 
out  that,  by  a  simple  substitution  of  one  note  for  the 
other,  there  is,  of  course,  no  increase  in  the  volume  of 
circulation  whatsoever.  It  is  merely  a  change  in  the 
form  of  circulation.  As  a  matter  of  fact,  we  find  that  the 
operation  of  all  Federal  Reserve  Banks  during  a  period 
of  one  and  a  half  years  has  caused  a  net  increase  in  the 
circulating  medium  of  the  country,  by  the  issue  of  Fed- 
eral Reserve  notes  and  Federal  Reserve  Bank  notes,  of 
less  than  $10,000,000.  On  the  other  hand,  the  national 
bank  circulation  has  decreased  during  the  period  No- 
vember 2, 1914,  to  June  1, 1916,  by  $53,000,000,  exclusive 
of  the  redemption  of  the  approximately  1385,000,000  of 


22 


Future 
reserve 
require- 
ments 


emergency  currency  issued  under  the  so-called  Aldrich- 
Vreeland  Act.  While  it  is  evident,  therefore,  that  the 
Federal  Reserve  System  has  not  increased  the  volume  of 
circulation,  the  process  of  substituting,  as  a  means  of 
circulation,  the  Federal  Reserve  note  for  the  gold  cer- 
tificate has  the  most  important  effect  of  strengthening 
the  potential  lending  and  note  issuing  power  of  Federal 
Reserve  Banks  in  case  of  need.  To  refuse  this  larger 
power  of  protection  for  fear  that  it  might  be  misused 
would  be  tantamount  to  refusing  to  give  a  modern  re- 
volver to  a  policeman  for  fear  that  he  might  shoot  at  the 
wrong  man  and  at  the  wrong  time. 

But,  let  me  ask  you,  gentlemen,  is  this  the  proper  time 
for  country  bankers  to  urge  us  to  recommend  to  Con- 
gress the  further  reduction  of  their  reserve  requirements 
or  to  recommend  that  they  be  granted  permission  to  con- 
tinue to  hold  a  certain  percentage  of  their  reserves  with 
their  central  or  reserve  city  correspondents? 

Some  day,  no  doubt,  it  will  be  proper  to  reduce  reserve 
requirements,  but  that  can  only  be  brought  about  by  a 
systematic  strengthening  of  the  central  reservoirs.  The 
stronger  the  Federal  Reserve  Banks,  the  easier  the  access 
to  their  resources  by  sale  of  liquid  paper,  the  less  will 
become  the  necessity  for  member  banks  to  maintain  in 
their  own  vaults,  as  a  legal  requirement,  large  segregated 
gold  holdings. 

Steps  in  this  direction  are:  first,  the  substitution  of 
Federal  Reserve  notes  for  the  gold  circulation  in  the 
pockets  of  the  people;  second,  the  maintenance  with  Fed- 
eral Reserve  Banks  of  larger  member  banks'  balances, 
created  by  depositing  part  of  the  "optional"  now  kept  in 
vault  by  member  banks,  and,  finally,  the  increase  of  the 
number  of  depositors  to  be  secured  through  the  entrance 
of  the  State  institutions  into  our  system. 

23 


-^ 


State  banks       J  want  to  compHment  our  large  member  trust  com- 

and   trust  .  ^  ^ 

companies  panies  aud  state  banks  upon  the  broad  point  of  view 
which  guided  them  Avhen  entering  the  system;  but  I 
might  at  the  same  time  ask  their  powerful,  sister  institu- 
tions how,  under  present  conditions,  they  can  justify 
themselves  in  staying  out  of  the  system  and  in  throwing 
the  entire  responsibility  and  burden  upon  the  shoulders 
of  the  national  banks  and  those  few  trust  companies  and 
State  banks  that  have  become  members?  They  do  not 
contribute  their  fair  share  of  gold  to  the  general  reserve 
fund  of  the  nation,  nor  do  they  provide  their  share  of 
the  capital  of  the  Federal  Reserve  Banks.  Indeed,  not 
only  do  they  fail  to  contribute  their  share  of  strength  to 
the  system,  but,  unconsciously  perhaps,  they  become 
forces  that  make  for  the  direct  weakening  of  its  strength 
and  efficiency. 

Do  the  large  trust  companies  and  State  banks  claim 
that  pyramiding  of  reserves  is  sound?  Would  they  pre- 
fer to  see  our  ancient  system  perpetuated  and  the  re- 
forms contemplated  by  the  Federal  Reserve  Act  aban- 
doned so  as  to  make  room  again  for  the  good  old  condi- 
tions of  1893  and  1907?  Unless  they  are  willing  to  sub- 
scribe to  that  doctrine,  how  can  these  large  banking  in- 
stitutions, some  located  in  Central  Reserve  cities,  justify 
themselves  in  considering  as  reserve,  after  the  manner 
of  the  country  banks,  their  interest  bearing  deposits  with 
other  banks? 

If  a  call  loan  on  the  stock  exchange  made  by  a  trust 
company  is  not  a  reserve  but  a  loan,  is  it  sound  banking 
to  call  a  reserve  deposit  made  by  a  trust  company  in  a 
national  bank  a  reserve,  when  82%  of  it  is  loan  on  call  on 
the  stock  exchange?  Still,  it  is  just  through  these  de- 
posits that,  in  emergencies,  the  trust  companies  will  lean 
on  the  national  banks  and  the  national  banks,  in  turn, 
will  fall  back  on  the  Federal  Reserve  System.    The  net 


Objections 
and  An- 

BUfetM 


Dividends 
of  Federal 
Reserve 
Banks 


result  is  that  the  trust  companies,  in  building  up  their 
l>usiness  structure,  must  rely  today  on  the  greater  assur- 
ance provided  by  the  Federal  iieserve  System,  though 
permitting  the  member  banks  to  carry  the  entire  burden 
of  its  support.  Our  small  country  banks  will  have  to 
stop  pyramiding  of  reserves;  do  the  large  trust  com- 
panies and  State  banks  plan  to  continue  this  practice? 

What  is  it  that  powerful  and  prominent  institutions 
(some  of  which,  in  their  foreign  and  acceptance  busi- 
ness, derive  the  greatest  possible  advantage  from  the 
discount  market  and  the  general  prestige  of  the  Federal 
Keserve  System)  may  say  in  justification  of  such  an 
attitude? 

At  first  they  feared  that,  by  entering  the  system,  they 
might  lose  some  of  their  present  powers  and  privileges. 
But  the  Board  has  made  regulations  permitting  them  to 
continue  to  exercise  practically  all  legitimate  banking 
functions  enjoyed  by  them  in  the  past. 

Some  of  the  State  institutions  have  raised  the  point 
that,  by  joining  the  Federal  Reserve  System,  they  would 
be  called  upon  to  make  investments  in  the  stock  of  the 
Federal  Reserve  Banks  upon  which,  in  the  case  of  most 
of  the  Federal  Reserve  Banks,  no  return  has  as  yet  been 
paid. 

But,  gentlemen,  while  for  many  reasons  some  of  us 
would  favor  an  amendment  permitting  a  Federal  Reserve 
Bank  to  pay  back  a  portion  of  the  capital  paid  in  (leav- 
ing the  liability  upon  the  subscribed  but  unpaid  capital 
otherwise  unchanged),  provided  the  member  would  in 
turn  agree  to  increase  its  required  reserve  balance  by  a 
certain  proportion  of  its  optional  balance,  this  question 
in  itself  cannot  possibly  be  of  sufficient  importance  to 
keep  any  strong  State  institution  out  of  the  system. 
These  dividends  are  cumulative,  and  anybody  having  a 
moderate  degree  of  foresight  can  readily  appreciate  that, 


«5 


sooner  or  later,  the  back  dividends  will  ail  be  paid.  Even 
at  the  present  low  rate  of  return  of  2.4%,  secured  by 
Federal  Keserve  Uanks  from  their  investments,  they 
would  have  to  employ  only  an  additional  sum  of  less 
than  150,000,000  for  the  entire  system  to  earn  the  full 
six  per  cent  on  the  stock  at  present  paid  in.  When  the 
final  instalment  of  reserves  has  been  transferred  and 
with  the  return  of  more  nearly  normal  rates  of  interest, 
there  will  not  be  the  least  difficulty  for  these  banks  to 
earn  their  dividends  without  invesling  a  larger  propor- 
tion of  their  resources  than  would  be  consistent  with 
safety  and  conservatism. 

Right  of  State  banks  and  trust  companies  furthermore  claimed 

state  banks 

to  withdraw  that  if  they  entered  they  could  not  withdraw.  But  the 
Board,  in  the  exercise  of  its  power  to  prescribe  regula- 
tions as  a  condition  of  membership,  has  provided  that 
they  may  withdraw  under  conditions  previously  made 
known,  and  the  subscription  to  the  stock  of  a  Federal 
Beserve  Bank  made  by  a  State  institution  is  conditioned 
upon  this  express  agreement. 

No  exami-  They  have  objected  to  being  examined  both  by  their 
c'omptr^er  ^^^  banking  department  and  by  the  examiner  of  the 
Comptroller  of  the  Currency.  The  Board,  in  accordance 
with  the  provisions  of  the  Federal  Keserve  Act,  has  pro- 
vided, however,  that,  wherever  there  is  an  efficient  State 
examination,  as  in  New  York,  it  shall  be  accepted  in 
place  of  examination  by  the  Comptroller  and,  only  fail- 
ing that,  an  examination  shall  be  made  by  examiners 
under  the  supervision  of  the  Federal  Keserve  Board. 

Furthermore,  in  a  circular  letter  sent  to  all  State 
member  banks  in  May  of  this  year,  the  Board  and  the 
Comptroller  of  the  Currency  announced  that  State  mem- 
ber banks,  in  making  their  stated  reports  to  the  Comp- 
troller of  the  Currency,  might  use  the  form  of  statement 
prescribed  by  their  respective  State  banking  depart- 

26 


ments,  provided  they  are  rendered  as  of  the  same  date 
as  required  by  the  Comptroller  of  the  Currency  for  na- 
tional banks.  If  reports  are  not  rendered  on  those  dates, 
State  member  banks  are  required  to  use  the  same  forms 
as  national  banks,  but  they  may  omit  from  their  reports 
to  the  Comptroller  all  schedules  except  that  relating  to 
coin  or  coin  certificates. 

They  have  feared  that  the  Clayton  Act  would  deprive 
them  of  valuable  directors.  But  Congress  has  amended 
that  Act  so  as  to  permit  a  director  of  a  member  bank  to 
be,  at  the  same  time,  a  director  of  two  other  banks  or 
trust  companies,  provided  they  are  not  in  "substantial 
competition"  with  the  member  bank. 

I  know  the  arguments  that  are  being  advanced  that 
the  rulings  of  the  Board  may  be  changed  and  that,  there- 
fore, it  may  be  possible,  under  a  different  personnel  of 
the  Board,  to  reverse  the  present  arrangement  and  sub- 
ject the  State  banks  to  the  examinations,  reports,  and 
rulings  of  the  Comptroller  of  the  Currency.  But  that  is 
not  likely  to  happen,  and  if  it  did,  the  State  bank  or  trust 
company  could  exercise  its  privilege  to  withdraw  from 
membership  in  the  system. 

Let  us  assume,  however,  that  joining  the  Federal  Re- 
serve System  does  involve  certain  sacrifices,  some  of 
which  are  necessary  and  some  of  which  may  be  thought 
unnecessary.  If  you  throw  into  one  side  of  the  scales 
all  the  benefits  accruing  to  the  banks  and  the  nation  by 
the  creation  of  the  Federal  Reserve  System,  and  into  the 
other  the  sacrifices  to  be  made  by  its  members,  there  can- 
not be  any  doubt  whatsoever  that  the  advantages  will 
outweigh  the  disadvantages  a  thousandfold.  The  Fed- 
eral Reserve  Act  is  one  of  the  most  constructive  pieces 
of  legislation  that  ever  was  put  upon  our  statute  books. 
Nobody  could  be  foolish  enough  to  expect  that  a  law 

27 


Contribu- 
tion by  all 
essential  to 
success 


which  is  so  complicated  in  its  nature,  so  far-reaching  in 
its  scope,  and  a  compromise  in  so  many  details  between 
opposing  views,  could  be  absolutely  perfect.  It  is  a 
wonder  that,  from  the  beginning,  it  has  proved  as  work- 
able as  it  has. 

Personally,  I  am  on  record  as  having  opposed  several 
of  its  features  of  detail.  But,  when  the  President  hon- 
ored me  by  inviting  me  to  become  a  member  of  the 
Board,  I  accepted  because  I  felt  that  the  fundamental 
principles  were  sound  and  that  the  Act,  as  it  stood,  would 
redound  to  the  greatest  benefit  of  the  country.  I  felt 
confident  that  if  after  sincere  and  unbiased  efforts  in 
the  operation  of  the  Reserve  Banks,  defects  should  de- 
velop that  needed  correction,  we  could  confidently  count 
on  a  patient  and  sympathetic  hearing  before  Congress. 
And  let  me  remind  you,  gentlemen,  that  several  of  my 
colleagues  and  the  able  men  who  accepted  to  serve  at  the 
head  of  your  Federal  Reserve  Bank  of  New  York,  all 
joined  in  the  same  spirit ;  they  did  so  for  the  purpose  of 
serving  their  country  even  though  they  had  to  make 
material  sacrifices  in  doing  so. 

In  one  of  his  admirable  speeches,  entitled  "Ideals  and 
Doubts,"  Oliver  Wendell  Holmes,  Associate  Justice  of 
the  Supreme  Court  of  the  United  States,  makes  the  fol- 
lowing statement  concerning  the  topic  of  legal  reform: 

"To  know  what  you  want  and  why  you  think  that 
such  a  measure  will  help  it  is  the  first  but  by  no 
means  the  last  step  towards  intelligent  legal  reform. 
The  other  and  more  difficult  one  is  to  realize  what 
you  must  give  up  to  get  it,  and  to  consider  whether 
you  are  ready  to  pay  the  price" 
These  are  golden  words  of  wisdom  which,  at  the  pres- 
ent juncture  of  our  economic  history,  every  bank  presi- 
dent in  the  United  States  ought  to  have  constantly  before 
his  eyes. 


For  generations  we  have  lived  shackled  and  constantly 
menaced  by  a  defective  and  old-iasliioned  bankinj*  sys- 
tem ;  tor  years  we  have  toiled  to  secure  reform.  We  have 
at  last  brought  it  about  and,  whetlver  or  not  it  pleases 
everybody  in  every  detail,  it  behooves  us  all  to  do  our 
share  in  making  it  a  success  for  the  greatest  possible 
benefit  of  our  country,  no  matter  whether  it  involves 
some  small  or  even  a  heavy  sacrifice.  That  is  the  prin- 
ciple which  members  of  the  Board  have  laid  down  for 
themselves,  and  if  they  are  to  be  faithful  to  their  trust 
and  successful  in  their  task,  there  is  no  other  principle 
upon  which  they  can  deal  with  the  banks  of  the  country. 

That  is  why,  though  sincerely  appreciating  the  hard- 
ship it  entails  for  the  country  banker,  and  fully  sym- 
pathizing  with  the  difficulties  of  his  position,  we  must 
say  to  him :  "Forget  these  exchange  charges.  We  think 
our  new  clearing  plan  is  fair  and  equitable,  free  from 
unsound  principles  and  bound  to  become  a  very  effective 
instrument  for  the  general  good.  It  otters  to  take  from 
you  at  par  all  your  checks  on  any  member  bank  of  the 
entire  United  States,  and  on  certain  State  banks  in  addi- 
tion, and  will  ]*efund  you  any  actual  expense  that  you 
may  incur  in  case  you  have  to  remit  currency.  All  it 
asks  of  you  in  return  is  that  you  remit  without  charge 
to  your  Federal  Reserve  Bank  in  payment  of  checks 
drawn  on  yourself.  But  even  if  we  did  not  believe  that, 
by  the  service  we  render  and  by  relieving  you  of  the 
necessity  of  maintaining  bank  balances  all  over  the  coun- 
try, we  shall  compensate  you  for  what  you  think  will  be 
your  loss,  we  have  to  hold  to  the  view  that  you  must  pay 
the  price — whatever  your  little  share  may  be — for  the 
larger  benefit  of  all." 

The  new  system  brings  new  opportunities;  as  an  illus- 
tration, let  me  remind  the  country  banker  that  his  ex- 
change loss  will  appear  to  him  very  unimportant  if  he 

39 


Message 
to  State 
Banks   and 
Trust 
Companies 


will  adopt  the  habit  of  paying  for  his  deposits  a  fluctuat- 
ing rate  of  interest,  which  should  aiways  remain  a  cer- 
tain percentage  below  the  ninety-day  discount  rate  of  his 
Federal  Keserve  Banii.  The  unreasonable  rates  paid  for 
deposit  money  are  a  serious  menace  to  the  safety  of  our 
banking  system  and  the  economic  development  of  our 
country. 

And,  with  this  same  spirit,  and  even  with  greater  em- 
phasis, we  must  say  to  the  State  banks  and  trust  com- 
panies : 

At  this  momentous  period  of  its  financial  history,  the 
country  is  entitled  to  have  its  banking  system  attain  its 
maximum  strength.  Irrespective  of  burdens  involved — 
imaginary  or  real — it  is  the  duty  especially  of  these  large 
State  institutions  to  come  in  promptly  and  contribute 
their  share,  making  whatever  suggestions  they  think 
helpful  as  friends  and  members  rather  than  as  critics 
from  the  outside. 

I  am  glad  to  state  that  one  of  our  largest  trust  com- 
panies expressed  precisely  this  broad  point  of  view  when 
applying  for  membership. 

The  Federal  Reserve  System  will  grow  stronger  with 
every  coming  day,  and  the  stronger  it  grows  and  the 
more  it  perfects  its  organization,  the  more  apparent 
will  its  benefits  become  for  all  its  members.  A 
great  deal  of  pressure  has  been  brought  to  bear  upon 
the  Federal  Reserve  Board,  particularly  during  the  early 
stages  of  the  development  of  American  bankers^  accept- 
ances, to  cause  discrimination  against  the  acceptances  of 
non-member  banks.  So  far  the  Board  has  been  disin- 
clined to  favor  such  a  policy,  as  it  was  thought  to  be  in 
the  general  interest  of  the  country  to  give  encouragement 
to  the  freest  and  fullest  development  of  this  acceptance 
business,  which  is  of  the  greatest  benefit  to  the  trade  of 


30 


our  country.  The  Board  thought  further  that  time 
should  be  giveu  to  the  State  banks  and  trust  companies 
to  acquaint  themselves  fully  with  the  policies  to  be  pur- 
sued both  in  dealing  with  State  institutions  in  general 
and  the  acceptance  business  in  particular.  Nor  does  the 
collection  plan  just  approved  by  the  Federal  Keserve 
Board  contain  any  element  of  discrimination  against 
non-member  State  banks  collecting  at  par,  without  cost, 
their  out  of  town  checks  through  member  banks  of  the 
system.  The  Board  believes,  however,  that  the  time  has 
now  come  for  these  large  institutions  to  recognize  their 
duty  to  join  the  system.  It  will  not  be  long  before  the 
banks  that  stay  out  of  the  system  will  become  conscious 
of  the  fact  that  member  banks  will  command  the  greater 
confidence,  and  there  is  no  doubt  that  the  public  will 
begin  to  resent  having  its  interests  sacrificed  for  the  ben- 
efit of  institutions  unwilling  to  join  the  general  pro- 
tective system,  and  that  before  long  their  resentment 
will  have  to  be  heeded. 

Before  closing,  I  should  like  to  make  it  clear  that, 
though  speaking  to  the  New  York  State  Bankers^  Asso- 
ciation, whatever  I  have  said  is  meant  to  apply  to  the 
State  institutions  of  the  entire  country.  I  should  not 
wish  to  give  the  impression  that  I  am  particularly  criti- 
cal of  the  New  York  institutions.  Quite  the  contrary,  1 
am  very  glad  to  have  this  opportunity  of  testifying  pub- 
licly to  the  spirit  of  good  citizenship  that  you  have  mani- 
fested in  every  phase  of  the  development  of  the  system 
from  the  very  first  beginnings,  when  we  were  dealing 
with  the  gold  and  cotton  funds  in  the  fall  of  1914.  Tn 
the  negotiations,  resulting  in  the  creation  of  these  two 
funds,  there  asserted  itself  for  the  first  time  in  our  finan- 
cial history  a  broad  national  spirit  uniting  in  a  work 
of  patriotic  co-operation  national  banks,  State  banks  and 
trust  companies  of  every  section  of  the  country.  That 
was  the  first  effect  of  the  coming  of  the  Federal  Reserve 

31 


System,  the  physical  organization  of  which  at  that  time 
had  not  even  been  completed.  It  is  this  same  spirit,  this 
larger  conception  of  banking  functions  and  ideals,  that 
will  ultimately  lead  into  the  Federal  Keserve  System  all 
elements  worth  having;  that  is,  all  elements  of  financial 
and  moral  strength. 

I  trust  that  my  frankness  will  not  be  misunderstood 
by  you.  There  is  an  old  adage  that  "imitation  is  the  sin- 
cerest  form  of  flattery."  I  venture  to  paraphrase  this  say- 
ing into:  "frankness  is  the  sinceresc  form  of  flattery,'' 
because  it  shows  that  you  respect  the  intelligence  and 
moral  fibre  of  your  audience. 

Summary  j  believe  that  our  future  looms  large  beyond  measure ; 

and  con- 
clusion 

I  believe  it  our  duty  to  be  financially  prepared  on  the 
broadest  possible  scale ; 

1  believe  that  we  should  use  the  months  ahead  of  us, 
not  to  expand  any  further,  but  rather  to  consolidate  our 
strength ; 

1  believe  that,  through  the  Federal  Keserve  Banks,  we 
should  strengthen  our  hold  on  the  gold  in  circulation 
and  that  the  stronger  the  gold  holdings  of  these  banks, 
the  better  shall  we  be  equipped  to  cope  with  the  prob- 
lems ahead  of  us,  of  helping  ourselves  and  of  helping  the 
world ; 

I  believe  it  to  be  the  duty  of  every  bank  in  the  country 
to  contribute  its  share  in  equipping  our  nation  for  this 
task; 

I  believe  that  State  institutions  which  are  strong 
enough  should  come  in  now  and  do  their  share,  no  matter 
whether  or  not  they  are  in  full  accord  with  every  detail 
of  the  Federal  Reserve  machinery ; 

32 


1  believe  that,  as  we  proceed  and  gain  in  experience, 
wiiatever  may  prove  harmful  will  be  remedied.  The  ten- 
dency of  the  country  is  for  a  fair  deal  for  fair  people; 

While  I  believe  that  the  country  expects  that  strong 
State  institutions  should  do  their  duty  and  join,  we  are 
neither  begging  nor  clubbing  anybody  to  come  in  nor  to 
stay  in ; 

But  I  firmly  believe  that  the  future  will  belong  to  those 
banks — national  or  State — that  are  members  of  the  Fed- 
eral Reserve  System,  -:,.... 


33 


Press  of  The  Financial  Age,  2  Rector  Street 


l1 


"^^  -''  > 


.'^^, 


